Currently, many health care related expenses are either directly tax deductible or can be paid with “pre-tax” dollars using one or more health care expense account programs.
In many cases, specific health care expenses are directly tax deductible. As one example, typically, if the accumulated health care expenses for a given year exceed a defined percentage of the employee's/taxpayer's income, the healthcare expenses are deductible. However, to claim this deduction, the employee/taxpayer must keep track of all health care expenses and determine which healthcare expenses are considered “legitimate” health care expenses by the IRS or other government tax agency. For many employees/taxpayers, keeping track of these expenses is too burdensome and therefore valid tax deductions are never claimed because the employee/taxpayer lacks the proper tracking and documentation and/or does not consider the deduction worth the considerable effort needed to keep these records.
In addition to direct tax deductions, health care expense account programs can also provide a taxpayer with tax relief for some health care expense. Currently, many employers offer health care expense account programs in addition to traditional health care insurance. Herein, health care expense account programs are defined as programs which provide an employee/taxpayer and/or employee/taxpayer dependents a designated health care expense account that is assigned to the employee/taxpayer and is used to reimburse the employee/taxpayer for defined eligible health care expenses incurred by the employee/taxpayer and/or the employee's/taxpayer's dependents. Examples of currently available health care expense account programs include, but are not limited to: flexible spending accounts (FSAs); health care reimbursement arrangements (HRAs); and health care spending accounts (HSAs).
In many cases, the health care expense account is a virtual account maintained by a health care expense program administrator or management service, also called a program administrator, either under the direct control of the employer or as a third-party agent of the employer. In other cases, the health care expense account is set up by the employees/taxpayers themselves. Typically, health care expense accounts are funded by either by the employee/taxpayer and/or the employer.
Health care expense account programs typically help the employee/taxpayer pay health care expenses that are not covered by the employee's/taxpayer's health care insurance such as: deductibles; the employee's/taxpayer's portion of health care expenses; co-payments for doctors visits and prescriptions; co-payments for medical supplies and devices; extended care and/or home care; and various other health care expenses determined to be eligible by the employer and/or health care expense program administrator and/or the IRS.
In typical operation, funds are deposited in the health care expense account by the employee/taxpayer, the employer, or a combination of both. Once the health care expense account is funded, the funds are made available to reimburse the employee/taxpayer for out of pocket expenses incurred by the employee/taxpayer in eligible health care expense transactions. In most cases, the employee/taxpayer first pays the health care expense using his or her own funds. Then the employee/taxpayer must identify the transaction, provide documentation for the transaction, and make a request to the program administrator for reimbursement of the funds.
The process above sounds simple enough and represents a genuine effort on the part of the government and employers to help employees/taxpayers afford quality health care. However, as noted above, in reality, the process of keeping track of numerous eligible health care expenses on a day-to-day, transaction-to-transaction, basis often becomes too burdensome for many employees/taxpayers and, in many cases, the employee/taxpayer simply chooses not to claim a healthcare expense deduction and/or participate in the health care expense account program. This is especially true since, in many cases, individual eligible health care expenses are often only a few dollars, such as a $10.00 co-pay for a doctor visit or prescription. However, in many cases, large numbers of individual eligible health care expenses are incurred by the employee/taxpayer and/or the employee's/taxpayer's dependents over the course of a year and these sums go unclaimed because the employee/taxpayer does not recognize the cumulative effect of numerous relatively small payments over the course of a year. As a result, well meaning deduction and reimbursement programs intended as “benefits” come to be viewed by the employee/taxpayer as “burdensome” at best, and often as simply irrelevant. This fact serves neither the employee/taxpayer nor the employer's/government's best interests.